Can Government Demand Stimulate Private Investment? Evidence from U.S. Federal Procurement

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Summary:

We study the effects of federal purchases on firms’ investment using a novel panel dataset that
combines federal procurement contracts in the United States with key financial firm-level
information. We find that 1 dollar of federal spending increases firms’ capital investment by 7 to 11
cents. The average effect masks heterogeneity: Effects are stronger for firms that face financing
constraints and they are close to 0 for unconstrained firms. In line with the financial accelerator
model, our findings indicate that the effect of government purchases works through easing firms’
access to external borrowing. Furthermore, industry-level analysis suggests that that the increase in
investment at the firm level translates into an industry-wide effect without crowding-out capital
investment of other firms in the same industry.